The US Dollar to Canadian Dollar exchange rate advanced on Monday. The US Dollar was able to benefit from US data and high Fed rate hike bets, while the Canadian Dollar was weakened by anxiety about the future of the oil market. USD CAD began the week trending at the level of 1.36 and has thus far been unable to hold above the level of 1.37.
A big increase in June Federal Reserve interest rate hike bets over the last week has helped increase US Dollar demand.
Last week the Fed held its May policy decision, in which it indicated that slower US growth in Q1 was temporary. The bank seemingly still intended to hike US interest rates another two times in 2017.
Since the meeting, markets have been increasingly confident that the next Fed interest rate hike would come as soon as June.
CME’s FedWatch tool has seen bets of a June rate hike jump from 67.5% to over 85% in the last week.
This has been bolstered by recent US data. Monday’s American session saw the publication of April’s US consumer inflation expectation results, which improved from 2.74% to 2.79%. With inflation expected to continue increasing, investors are even more confident that the Fed will continue hiking rates.
Last week’s April Non-Farm Payroll results didn’t have much of an impact on Fed rate hike bets. While April’s stats beat expectations, March’s were revised lower.
The Canadian Dollar, on the other hand, has been weakened in the past week by disappointing oil price performance.
Prices of Canada’s most lucrative commodity have fallen to below US$50 per barrel in recent weeks as US oil stockpiles remain high. With the commodity in oversupply, demand for more production is weak and prices have slumped.
Oil saw a slight boost in demand on Monday as oil producers from OPEC indicated that the oil production cuts could continue into 2018. Saudi Arabia energy minister Khalid al-Falih stated on Monday that the group’s cuts had been working.
OPEC hopes were enough to push oil prices up slightly, but they remained below the key US$50 per barrel range.
Concerns remain high that OPEC’s plans will not be enough to lighten the US oil supply glut – especially with drilling and oil production in the US continuing to rise this year. As a result, the oil-correlated Canadian Dollar has been unable to benefit from oil news in recent weeks.
The past week’s Canadian data has failed to improve the ‘Loonie’ outlook. While Canada’s trade deficit lightened more than expected in March, from C$-1.08b to C$-0.14b, Canada’s April unemployment results were mixed. While unemployment dropped to 6.5%, this was largely due to the participation rate worsening from 65.9% to 65.6%.
Monday’s Canadian housing starts results failed to impress too, coming in below expectations.
The USD CAD outlook has the potential to change further on Friday when April’s US inflation data is published. If inflation beats expectations, bets of a June Fed interest rate hike will increase further and the US Dollar may benefit.
Friday will also see the publication of April’s US retail sales results and Michigan University’s May consumer sentiment results.
The Canadian Dollar’s outlook will continue to be shifted by changes in oil markets, but analysts are doubtful that oil prices will recover much unless US oil inventories begin to see a definite trend of lightening.
At the time of writing this article, the US Dollar to Canadian Dollar exchange rate traded at around 1.36. The Canadian Dollar to US Dollar exchange rate trended in the region of 0.73.